The Turing Test


The Turing test goes something along the lines of not being able to distinguish machine behavior from that of a human as a sign of artificial intelligence. In the digital age of innovation, quants, algorithms, optimizers and robo-advisors it may appear to some that we are already there in the investment community. But before we go too far, what if we put the question the other way round. "When does human behavior look like a machine?" and then perhaps we have the test for something that needs to be better articulated?

Active Risk

The kernel of many investment decisions is how much 'active risk' to take in comparison to a benchmark of peers. This kernel of truth is boosted by an assumption that fiduciary duty means maximizing financial returns, whilst respecting the clients' values and objectives. In many cases, however the objective is simply to maximize (risk-adjusted) return without recourse to the clients' values because the assumption is that clients simply wish to maximize return irrespective of their values.

Circular Logic

This circular logic that does not test values, the most emotive and subjective aspect of the investment process least able to be commoditized and replicated, means that the process of investment management can begin to look like a machine. If this is the case and we can use algorithms to replace advice, because they look just like the real thing, and we can deliver our services digitally what's to stop the marginal cost of investment management approaching zero?

No Brainer

Take the case of tobacco where, for instance, there has been a very successful campaign to persuade superannuation (pension) funds in Australia to divest led by the pioneering work of Bronwyn King. It was easy for the 'supers' to take a values led decision because their benchmarks contained next to no tobacco stocks.

The evidence relating smoking to disease and premature death is well known. But some fund managers will argue that, to level the playing field, other 'consumer disservices', such as sugary drinks should be taxed and that this tax is a net benefit to society overall. This is wide of the mark and completely misses the point, but it does serve to show how resistant to complex trade offs managers are when the status quo serves a narrow set of valueless objectives.

Moral Maze

The whole point of subjectivity, emotion and imagination is to be able look at different states of the future world to assess and process our risks as individuals, organizations and groups in the context of our wider operating environments. The world of robo-advice and robo-investment management does offer a low cost choice for some and has been extraordinarily successful in the form of iShares and self-service platforms.

But my money is on those investment managers and advisors who can best relate to their clients and offer services that optimize risk, rewards and values to meet needs in an increasingly innovative and connected world. Being able to articulate and execute on these complex trade offs will, in my view, be a source of sustained competitive advantage by keeping close with the client.


The question we should ask is why is it important to make the link between values and risk. The answer is that it forces the agent (whoever is managing your money) to make decisions outside of the normal frame of reference, especially where it is looking increasingly likely that there is a build up of financial risk.

For instance, a values led approach would have asked you to question the build up of systematic risks in the banking sector and ask difficult questions about investing in industries that cause harm; just as it would have asked questions about the commodity and oil cycle. It creates a process of intelligent risk management outside of a narrow framework and that benefits everyone.


It is not that there is a right or wrong answer to complex trade offs and part of the market's job is to figure these out over time as it sorts out the winners from the losers. But the market does need a values based frame of reference and it has emerged in the form of environmental, social and corporate governance.

This allows agents (the pension and wealth managers) to legitimately take long term and ethical risks into consideration - like a shift to a low carbon economy or the potential for tobacco companies to lose their license to operate.

It also encourages a process of engagement where multiple actors, such as companies, investors, regulators, politicians and NGOs can meaningfully work on addressing risks that valueless frames of reference simply ignore. For instance, this type of work has led some of the European oil majors actively reporting on a transition to a low carbon economy as part of their risk management.

Optimizing values, risk and return

A values based risk management framework, such as ESG, creates agency in the investment process. Ultimately, it allows managers to use their subjectivity, emotion and imagination to look at different states of the future world to assess a much wider array of interconnected risks. This is likely to be the next generation of investment management aided by digitial innovation.